Ross Stores Execution Mistakes Aren't Bothering Bernstein Just Yet

Bernstein maintains its Market-Perform rating on Ross Stores, Inc. ROST, saying that while execution mistakes drove a slight comp miss, the company's off-price momentum remains intact.

Ross Stores reported first-quarter EPS of $0.73 in line with consensus. Comparable store sales growth of 2 percent, despite coming in at the high end of guidance, were below consensus estimates of 2.4 percent on execution mistakes in its ladies apparel assortment.

In addition, higher distribution costs had offset 35 basis point improvement in merchandise margins.

"Though we had expected a slightly stronger performance at ROST, the soft comp appears to be driven by specific execution issues rather than an inflection in traffic; this quarter reinforces our overall positive outlook on the Off-Price segment, which continues to be among the few retail concepts seeing consistently growing consumer footfall," analyst Anne-Charlotte Windal wrote.

Related Link: Piper Downgrades Ross Stores, Says "No One Is Immune" To Weakening Consumer Environment

But, the company raised its FY16 EPS guidance to $2.63–$2.72 from $2.59–$2.71 on an unchanged comp guidance of 1 to 2 percent.

For the second quarter, the company sees EPS of $0.64–$0.67 on an assumed 1–2 percent comp and operating margins of 13.8–14.0 percent.

Windal expects a 3 percent comp for both the second quarter and full year. Given strong trends in merchandise margin, it forecasts gross margin expansion of about 35bps for FY16. Further, it anticipates second quarter EPS of $0.69 and FY16 EPS of $2.74.

Although the company did not set a recovery timeline for its ladies apparel business, the analyst stated, "We note the large open-to-buy the company maintains and progressively easier compares in 2Q and 3Q and believe ROST can outperform its comp guidance."

As the second largest U.S. Off-Pricer, Windal noted ROST's "resilient business model" and "high visibility growth runway," in addition to focused execution, strong cost discipline and shareholder friendly capital allocation.

However, the analyst remains on the sidelines on a full valuation despite acknowledging the company's strong fundamentals. The analyst model 11 percent long-term EPS growth on 7 percent revenue CAGR.

At time of writing, Ross Stores was down 4.39 percent at $53.08. The analyst has a price target of $62.